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AEGIS Chief Investment Officer: 'Unusual' Market Where Even Flight-to-Quality Assets Produce Negative Returns

With all asset classes producing negative returns, insurance asset managers are searching for creative ways to manage their investments, said Rip Reeves, chief investment officer and treasurer for AEGIS Insurance Services.


Rising interest rates, inflation and the war in the Ukraine are among the challenges now facing insurance asset managers, said Reeves. The following is an edited transcript of video interview.

Q: How would you describe the insurance Asset Management landscape today?

Rip Reeves: It's certainly challenging, year to date in 2022 — which probably explains my increased vodka drinking. When you're when you're in an environment where everything from safe haven assets of US Treasuries and agencies to the more risky assets, such as high yield and equities are all generating negative returns, it's not a lot of fun to manage money through these types of environments. It's quite unusual. And this is especially challenging given that we are in this environment after three terrific years of portfolio returns and 2019, 2020 and 2021. And depending upon your enterprise's risk tolerance — the more conservative folks are certainly going to be playing more defense, where you're going to be shortening duration, probably holding more of your liquidity in cash or short term — which one of the truly under-appreciated asset classes and investment strategy is cash as anyone who had equities or anything of any risk during 2008 financial crisis saw or even in March of 2020. But for those general accounts that have a higher risk tolerance, and therefore a more aggressive strategy approach to their investment portfolio, this is a really nice buying opportunity to add to risk assets, because we've seen a pretty significant underperformance of them so far this year. But these types of markets where across the board of fixed income and equities, you've got negative returns being generated are just not a lot of fun. So, but you know, this is what we're paid to do. So you live through it.

Q: Have you seen a market like this before?

Not really. It would be pretty easy and convenient, to say, oh, you know, the financial crisis from mid 2008 to March of 2009 — and the three and a half really unenjoyable weeks during March of 2020. But those were different in the instance that when you've got a lot of pain, in the riskier asset classes, such as equities and high yield, even BBB rated bonds, you've always got the flight to quality assets that are better diversifying and generating very positive returns such as US Treasuries agency debentures agency mortgage backed securities. That is not the case this time, because of the central banks increasing rates due to inflation issues. You've got even your safe haven assets — the US Treasury index year to date is down 3.5% negative. And that's your flight-to-quality assets. This is unusual that we've got all of your core fixed income and equity asset classes, certainly in the public space, that are all generating negative returns. And that is what's kind of unusual about this to see that kind of high correlation across the across the landscape, regardless of what asset class you're looking at.

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Q: How are insurers responding?

As general, in our particular industry, you're going to see a wide range in there. And there's a lot of reasons for that. One of the things that I've always loved about managing money for insurance companies versus some of the other types of money to manage, is that every one is very different. There's a unique approach and a unique solution for a healthcare company — what's suitable for them versus a life company, what's suitable for them. And I personally think that's a lot of fun to play and figure out that puzzle and that's suitable solution. So again, if you’ve got a more conservative, stereotypical support role in your general account, you're probably playing pretty serious defense in a market like this. If you're a bit more aggressive and have a higher risk tolerance approach to the invest strategy, you're looking at the weakness of 2022 so far as a buying opportunity to add to some of those asset classes. Given that you're going to make more money and the rebound. What we've been doing at Aegis are some of the more block and tackling strategies. For example, we've been on a trend all through last year, and this year, of shortening the duration of our portfolios to the extent that we can, understanding that we've got at the moment, probably about a one-and-half and two-year duration mismatch between the estimated liability duration and our portfolio duration. And we will continue to do that as a defensive measure, with expectations of continued rising rates in 22, likely experienced in 21. We're also utilizing an accounting designation of held-to-maturity for our illiquid, and are very passive mandates, which takes the principle of volatility out of the equation from an accounting standpoint. We're also have a pretty healthy allocation to the private markets, both on corporates and mortgages. One of the nice things in that you achieve, one of the advantages that you get for the give up in liquidity is that the private markets just don't have the same level of response to changes in volatility in the equity markets, changes in interest rates, that the public markets do. These measures kind of help us whether through a rising rate environment, and last year, certainly generated a positive return in our bond portfolio alone. These are helpful measures to weather the storm, so to speak

Q: What do you expect to see going forward for the remainder of the year?

Oh, more pain, from the bond side of the equation, certainly continue to expect continued volatility. Because while we're dealing with a war at hand with Russia and Ukraine, there are certainly some hotspots brewing elsewhere. My belief is that this geopolitical tensions and headwinds to various risk markets will probably be exacerbated by less globalization, which had been one of the themes for the past decade, as most of the countries have become more a little nationalistic and independent. It’ll be interesting to see how that plays into the world order. Certainly, all eyes are going to be on the Fed to see just how well they manage and communicate the execution of increasing rates. With obviously the intent on a soft landing as opposed to a crash. I certainly think that there will be a continued migration of insurance assets out of the typical core public space into private markets into some of the other alternative markets as the education of the investment teams continues to increase, some of these non core allocations will continue to increase in their use and, and their positions within our investment strategy. So those are some of the things that will be interesting to watch, analyze, view and see just how much they can play a role in our portfolios going forward.

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